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The Bloom May Be Off The Tulip Model (Int'l Edition)

April 18, 1999

International -- European Business: The Netherlands

The Bloom May Be Off the Tulip Model (int'l edition)

A Dutch law that gives temps more security could backfire

When envious Europeans look at the so-called Tulip model, what they admire most is how many Dutch people have jobs. In Germany and France, unemployment rates hover stubbornly near 11%. The Netherlands, meanwhile, has a jobless rate of just 4.2%. That's largely because it has dropped almost all restrictions on temporary work. Temps make up approximately 4% of the Dutch working population--three times as many as in Germany and twice as many as in the U.S. Even the smallest Dutch city has a street clogged with temporary-employment agencies.

Now, the Dutch are making temporary work less temporary. That could reverse the gains their economy has made in the past decade since the labor market became more flexible. By forcing agencies to offer temps more job security and better benefits, the government hopes to attract more workers to the industry. But the measures could backfire in higher employment costs. And once the country reverses its open labor policies, they may be impossible to reinstate.BAD TIMING? A "flexibility and security" law that went into effect in January requires temp agencies to offer employees permanent contracts after they have worked 18 months at one company or 36 months at several. The legislation also provides temps with pensions, educational opportunities, and improved health-care coverage. As permanent employees of their agencies, temp workers could cost even more than full-timers.

With European growth slowing, this may be the worst possible time to make such a move. Even before the new law was enacted, economists had begun lowering their forecasts for Dutch growth, which hit 3.8% last year, to 2.2% this year and 1.8% in 2000. Temp workers with a permanent contract plus pension and education benefits could cost employers 7% more than before. "We need more, not less, flexibility," says Fred Pallada, an economist at ING Bank.

Flagship Dutch companies have relied heavily on temporary workers to manage their staffing needs without padding their payrolls. About 23% of the 6,500 workers at NedCar, which manufactures Volvo and Mitsubishi models, are temps. Because of the new law, the company will add 400 fixed positions and reduce the number of temps to 10% of its workforce by 2001. The extra wage costs don't frighten management. But full-time workers are difficult to lay off. "The car industry is very cyclical, and we worry about losing the flexibility of temps," says company spokeswoman Corinne van Iersel. Royal Philips Electronics, whose 44,000-employee workforce in the Netherlands consists of 15% temps, faces a similar challenge.

Unions pushed hard for the new law, arguing that temping creates an unfair, two-tier labor force. Yet during the three-year negotiations over the legislation, temp agencies won several concessions from the unions and the government alike. While German temps receive permanent contracts immediately, Dutch temps still must work at least a year and a half. "The new law reinforces the legal position of temps," says Lex Heij, director of the Association of Temp Industries, which represents the agencies.LAYOFFS. Heij and other industry leaders hope that this increased security will lure more people into the temporary workforce, whose growth has slowed over the past two years. But ultimately, the law designed to secure jobs could end up reducing them. Union leaders complain that rather than awarding permanent contracts, temp companies have fired 10,000 workers since the beginning of the year.

Temp companies say that number is much lower, but Ingrid Qualres, a spokeswoman for the Olympia Temp Agency in The Hague, concedes that "we're very careful to whom we give a full contract." If the Netherlands can't find a way to improve working conditions for temps without shrinking their employment opportunities, it could jeopardize the country's reputation as a model for European reform.By William Echikson in Brussels